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Capital Markets

Capital markets

The capital market is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission and the Financial Services Authority in the UK, oversee the markets, to ensure that investors are protected against misselling. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded. The capital market can be contrasted with other financial markets such as the money market which deals in short term liquid assets, and derivatives markets which deals in derivative contracts.

Market

are still common in France. Resellers and farmers sell fruits and vegetables, but also meat and fish, and other products.]] In general parlance, a market is a location where those willing to pay a price for something meet those willing to sell it. In marketing, a market is the sum total of potential buyers of a product. In economics, a market is a mechanism which allows people to trade, normally governed by the theory of supply and demand, and thereby allocates resources through a price mechanism. It typically involves a bid and ask process. Both general markets (where many commodities are traded) and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, e.g., on gifts.

Marketplaces and street markets

200px 200px 200px A marketplace is a location where goods and services are exchanged. The traditional market square is a city square where traders set up stalls and buyers browse the merchandise. This kind of market is very old, and countless such markets are still in operation around the whole world.
- In the USA such markets fell out of favor, but renewed interest in local food has cause the reinvention of this type of market, called farmers' markets, in many towns and cities.
- In continental Europe, especially in France, street markets, as well as "marketplaces" (covered places where merchants have stalls, but not entire stores) are commonplace. Both resellers and producers sell their wares to the public.
- Markets are often temporary, with stalls only present for one or two days a week ("market days"), however some (such as Camden Market in London, UK) are open every day of the week. Such markets are normally specialist—the various stalls of Camden Market, along with the shops associated with it, sell a variety of alternative lifestyle products ranging from clothes and jewellery to CDs, instruments and furniture. An example of a large market is Chatuchak weekend market in Bangkok. The Roman term for market, still in use in a related sense, is forum. The modern shopping mall can be seen as an extension of this concept.

Wholesale markets

A wholesale market is a market which primarily sells to traders such as caterers and small shopkeepers, rather than to members of the public, although members of the public are not necessarily excluded. London, England has several centuries old wholesale markets such as Smithfield Market and Billingsgate Fish Market.

Economic markets and marketspaces

In modern times, mainly after the invention of the electronic computer, markets are not always located in a physical space. Such virtual markets consist of communication paths where information exchange is easy and deals may be struck. These are often called marketspaces. A notable example of this is the international currency market. The e-Bay web site can also be considered a marketspace.

Security (finance)

Security is a type of transferable interest representing financial value. Traditionally, securities have been categorized into debt and equity securities, and between bearer and registered securities. The uses that are made of securities have changed over time, both for the issuer and for the holder. Though the purpose of capital raising has sometimes been taken to be a defining characteristic of securities, its uses have expanded greatly in modern times. They are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, other derivatives, limited partnership units, and various other formal "investment instruments." Banknotes, checks, and some bills of exchange do not fall into this category. Transferable interest in commodities like oil, food grains or metals can also be referred to as securities. One can enter into contracts to buy or sell various quantities of commodities in various commodity exchanges. These become transferrable interest in the particular commodity

Concept of "security"

Originally the term "securities" was used to denote security interests (such as mortgages and charges) supporting the payment of a debt or other obligation. In Early modern Europe, companies and government agencies began to raise capital from the public using secured debt obligations, which came to be known as "securities". As shares became more readily transferrable from the Victorian era, their functional similarity to debt securities became clearer, and both forms of investment became known as "securities". More recently, the term has also been extended to include units in investment funds and other forms of readily transferrable investment. The concept of "securities" should be distinguished from "interests in securities". The latter are the assets of a client from whom an intermediary holds securities on an unallocated basis, commingled with the interests in securities of other clients. The distinction between securities and interests in securities is often overlooked in practice, although it is a source of legal risk.

Uses of securities

For the issuer

Issuers of securities include commercial companies, government agencies, local authorities and international and supranational organisations (such as the World Bank). Debt securities issued by government (called government bonds or sovereign bonds) generally carries a lower interest rate than corporate debt issued by commercial companies. Repackaged securities are usually issued by a company established for the purpose of the repackaging - called a special purpose vehicle (SPV). New capital: Commercial enterprises have traditionally used securities as a means of raising new capital. Securities are an attractive option relative to bank loans, which tend to be relatively expensive and short term. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of control over the business of the borrower via financial covenants. Through securities, capital is provided by investors who purchase the securities. In a similar way, government will raise capital from securities (see government debt) if taxation and other income are insufficient to meet public expenditure. This will result in a budget deficit. Repackaging: In recent decades securities have been issued to repackage existing assets. In a traditional securitisation, a financial institution may wish to remove assets from its balance sheet in order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way which makes them more attractive to investors.

For the holder

Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds. Investment: The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment. Collateral: The last decade has seen an enormous growth in the use of securities as collateral. Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A. These property rights enable A to satisfy its claims in the event that B becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks and government agencies are significant collateral takers.

Debt and equity

Securities are traditionally divided into debt securities and equities.

Debt

The holder of a debt security, typically a bond, is owed a debt by the issuer and is entitled to the payment of principal and interest, together with other personal rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds. In addition to serving as a source of finance for governments, treasuries are used to manage the money supply in the money market operations of central banks. Money market instruments are short term debt instruments, such as certificates of deposit, commercial paper and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Eurosecurities are securities issued internationally outside their domestic market. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit.

Equity

An equity is an ordinary share in a company. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer.
- Stock

Hybrid

Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. Convertibles are bonds which can be converted, at the election of the bondholder, into another sort of security such as equities. Equity warrants are contractual entitlements to purchase shares on pre-determined terms. They are often issued together with bonds or existing equities, but are detachable from them and separately tradeable.

Securities markets

Primary and secondary markets

The securities markets can be divided into the primary markets and the secondary markets. Primary markets (also known as capital markets) comprise of new securities to their first holders. The issue of new securities is commonly known as an Initial Public Offering (IPO). Issuers usually retain investment banks to assist them in finding buyers for these issues, and in many cases, to buy any remaining interests themselves. This arrangement is known as underwriting. In recent years the business of managing or underwriting issues of securities has been concentrated in the hands of a small number of investment banks, the most prominent of which are Goldman Sachs, Morgan Stanley and Merrill Lynch. The International Primary Markets Association (IPMA) is the trade association of banks and other investment institutions who are active in the primary markets. Transferability is an essential characteristic of securities. This trading is called the aftermarket or secondary market. Secondary markets often consist of what is called an exchange to facilitate the meeting of buyers and sellers. They are often referred to as stock exchanges, even though there are exchanges such as the Chicago Board of Options Exchange, where no stocks are traded. The International Securities Market Association (ISMA) is the trade association for the banks and other investment institutions that are active in the secondary markets.

Public offers and private placements

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of persons in a private placement. Often a combination of the two is used. The distinction between the two is important to securities regulation and company law. Another category, sovereign debt, is generally sold by auction to a specialised class of dealers.

Listing and OTC dealing

Securities are often listed in a stock exchange, an organised and officially recognised market on which securities can be bought and sold. Issuers may seek listings for their securities in order to attract investors, by ensuring that there is a liquid and regulated market in which investors will be able to buy and sell securities. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.

International debt markets

London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerised systems called Euroclear (in Belgium) and Clearstream (formerly Cedelbank in Luxembourg).

Legal nature of securities

Bearer and registered securities

Bearer securities

Bearer securities are issued in the form of a paper instrument. On the face of the instrument is written the promise of the issuer to pay the bearer of the instrument. By a legal fiction, the instrument is deemed to constitute the debt of the issuer, and not merely to represent them. In the absence of computerisation, bearer securities constitute tangible assets (or chose in possession). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the United Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the Exchange Control Act 1947 until 1963.

Registered securities

In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. The issuer maintains a register (usually maintained by an appointed registrar) in which details of the holder of the securities are entered and updated as appropriate. In recent years, registers have generally become computerised. Unlike bearer securities, registered securities comprise of a bundle of intangible rights (chose in action) including the right of the shareholder to share in all the assets of a company, subject to all the liabilities of the company. A transfer of registered securities is effected by amending the register. Traditionally, the delivery of bearer instruments by way of pledge has been widely used in the securities markets to collaterise financial exposures. The delivery of certificates to registered securities has also been widely used in collateral arrangements. However, because registered securities are not tangible assets, the legal effect of such a delivery is generally characterised not as pledge, but rather equitable mortgage.

Divided and undivided securities

The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A share represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.

Fungible and non-fungible securities

The terms "fungible" and "non-fungible" relate to the way in which securities are held. If an asset is fungible, this means that when such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the identical asset. In other words, the redelivery of fungibles is equivalent and not in specie (identical). Undivided securities are always fungible by logical necessity. Divided securities may or may not be fungible, depending on market practice. The clear trend is towards fungible arrangements.

Regulation

In the United States, the offer and sale of securities is either registered pursuant to a registration statement that is filed with the U.S. Securities and Exchange Commission (SEC) or are offered and sold pursuant to an exemption therefrom. Dealing in securities is heavily regulated by both the federal authorities (SEC) and state authorities. In addition the industry is heavily self policed by Self Regulatory Organizations (SRO's), such as the NASD or the MSRB. Due to the difficulty of creating a general definition that covers all securities, the SEC attempts to define "securities" exhaustively (and not very precisely) as: "any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or bankers' acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." - Section 3a item 10 of the 1934 Act. The US Courts have developed a broad definition for securities that must then be registered with the SEC. There is an investment of money, a common enterprise and expectation of profits to come primarily from the efforts of others. See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner Enterprises, Inc.

Government

A government is the body that has the power to make and enforce laws within an organization or group. In its broadest sense, "to govern" means to administer or supervise, whether over an area of land, a set group of people, or a collection of assets. The word government is derived the Greek Κυβερνήτης (kubernites), which means "steersman", "governor", "pilot" or "rudder".

Definitions

One approach is to define government as the decision-making arm of the state, and define the latter on the basis of the control it has over violence and the use of force within its territory. Specifically, the state (and by extension the government) has been considered by some to be the entity that holds a monopoly on the legitimate use of force within a territory. This view has been taken by the political economist Max Weber and subsequent political philosophers. The exact meaning of it depends on what is understood by “legitimate”. If we use the term in an ethical sense, then this definition would suggest that an organisation might be considered a state by its supporters but not by its detractors. An alternative definition is to take "legitimate" violence to be simply that which has active or tacit acceptance by the vast majority of the population. In this view, the presence of insurrection or civil war against an entity would jeopardise its claim to be a state, provided the insurrection enjoyed significant popular support. Similarly, an entity that shared military or police power with independent militias and bandits could be considered to have a monopoly on “legitimate” violence but to be failing to enforce it, reducing its claim to statehood. In practice, such situations are often described as "failed states". Government can also be defined as the political means of creating and enforcing laws; typically via a bureaucratic hierarchy. Under this definition, a purely despotic organization which controls a territory without defining laws would not be considered a government. Another alternative is to define a government as an organisation that attempts to maintain control of a territory, where "control" involves activities such as collecting taxes, controlling entry and exit to the state, preventing encroachment of territory by neighbouring states and preventing the establishment of alternative governments within the country. In Commonwealth English, the word "Government" can also be used to refer only to the executive branch, in this context being a synonym for the word "administration" in American English (e.g. the Blair Government, the Bush Administration). In countries using the Westminster system, the Government (or party in Government) will also usually control the legislature. The French use of the word gouvernement covers both meanings, whereas Canadian French generally uses it to mean the executive branch. The German word Regierung refers only to government as the executive branch; the wider meaning of the word, government as a system, can be translated as Staatsgewalt.

Forms of government

Various forms of government have been implemented. A government in a developed state is likely to have various sub-organisations known as offices, departments, or agencies, which are headed by politically appointed officials, often called ministers or secretaries. Ministers may in theory act as advisors to the head of state, but in practice have a certain amount of direct power in specific areas. In most modern democracies, the elected legislative assembly has the power to dismiss the government, but in those states that have a separate head of government and head of state, the head of state generally has great latitude in appointing a new one.

Theories

There are a wide range of theories about the reasons for establishing governments. The four major ones are briefly described below. Note that they do not always fully oppose each other - it is possible for a person to subscribe to a combination of ideas from two or more of these theories.

Greed and oppression

Many political philosophies that are opposed to the existence of a government (such as Anarchism, and to a lesser extent Marxism), as well as others, emphasize the historical roots of governments - the fact that governments, along with private property, originated from the authority of warlords and petty despots who took, by force, certain patches of land as their own (and began exercising authority over the people living on that land). Thus, it is argued that governments exist to enforce the will of the strong and oppress the weak.

Order and tradition

The various forms of conservatism, by contrast, generally see the government as a positive force that brings order out of chaos, establishes laws to end the "war of all against all", encourages moral virtue while punishing vice, and respects tradition. Sometimes, in this view, the government is seen as something ordained by a higher power, as in the divine right of kings, which human beings have a duty to obey.

Natural rights

Natural rights are the basis for the theory of government shared by most branches of liberalism (including libertarianism). In this view, human beings are born with certain natural rights, and governments are established strictly for the purpose of protecting those rights. What the natural rights actually are is a matter of dispute among liberals; indeed, each branch of liberalism has its own set of rights that it considers to be natural, and these rights are sometimes mutually exclusive with the rights supported by other liberals.

Social contract

One of the most influential theories of government in the past two hundred years has been the social contract, on which modern democracy and most forms of socialism are founded. The social contract theory holds that governments are created by the people in order to provide for collective needs (such as safety from crime) that cannot be properly satisfied using purely individual means. Governments thus exist for the purpose of serving the needs and wishes of the people, and their relationship with the people is clearly stipulated in a "social contract" (a constitution and a set of laws) which both the government and the people must abide by. If a majority is unhappy, it may change the social contract. If a minority is unhappy, it may persuade the majority to change the contract, or it may opt out of it by emigration or secession.

Operations

Governments concern themselves with regulating and administering many areas of human activity, such as trade, education, medicine, entertainment, and war.

Enforcement of power

Governments use a variety of methods to maintain the established order, such as police and military forces, (particularly under despotism, see also police state), making agreements with other states, and maintaining support within the state. Typical methods of maintaining support and legitimacy include providing the infrastructure for administration, justice, transport, communication, social welfare etc., claiming support from deities, providing benefits to elites, holding elections for important posts within the state, limiting the power of the state through laws and constitutions (see also Bill of Rights) and appealing to nationalism. Different political ideologies hold different ideas on what the government should or should not do.

Territory

The modern standard unit of territory is a country. In addition to the meaning used above, the word state can refer either to a government or to its territory. Within a territory, subnational entities may have local governments which do not have the full power of a national government (for example, they will generally lack the authority to declare war or carry out diplomatic negotiations).

Scale of government

Main articles: government ownership, government spending The scale to which government should exist and operate in the world is a matter of debate. Government spending in developed countries varies considerably but generally makes up between about 30% and 70% of their GDP.

Bond market

The bond market refers to people and entities involved in buying and selling of bonds and the quantity and prices of those transactions over time. Participants in the market trade bonds issued by corporations and various government bodies. Because of the relationship between bond prices and interest rates, references to the "bond market" are often used to indicate changes in interest rates or the shape of the yield curve. Other names for the bond market are the credit market and the debt market.

External links

- [http://www.bondmarkets.com/ The Bond Market Association] Category:Fixed income market

Financial Services Authority

The United Kingdom Financial Services Authority (FSA) is an independent non-governmental body that regulates the UK financial services industry. Its main office in based in Canary Wharf, London but it also has another office in Edinburgh. When acting as the competent authority for listing of shares on a stock exchange, it is referred to as the UK Listing Authority (UKLA), and maintains the Official List.

History

The FSA has the legal form of a company limited by guarantee (number 01920623). It was incorporated on 7 June 1985 under the name of The Securities and Investments Board Ltd at the instigation of the UK chancellor of the exchequer, who is the sole member of the company and who delegated certain statutory regulatory powers to it under the then Financial Services Act 1986. It changed its name to the FSA on 28 October 1997 and now exercises statutory powers given to it by the Financial Services and Markets Act 2000, which replaced the earlier legislation and came into force on 1 December 2001. In addition to regulating banks, insurance companies and financial advisers, the FSA has regulated mortgage business from 31 October 2004 and general insurance intermediaries from 14 January 2005.

Statutory objectives

The Financial Services and Markets Act imposed four statutory objectives upon the FSA:
- market confidence: maintaining confidence in the financial system
- public awareness: promoting public understanding of the financial system;
- consumer protection: securing the appropriate degree of protection for consumers; and
- reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime

Regulatory principles

The statutory objectives are supported by a set of principles of good regulation which the FSA must have regard to when discharging its functions. These are:
- efficiency and economy: the need to use its resources in the most efficient and economic way.
- role of management: a firm’s senior management is responsible for its activities and for ensuring that its business complies with regulatory requirements. This principle is designed to guard against unnecessary intrusion by the FSA into firms’ business and requires it to hold senior management responsible for risk management and controls within firms. Accordingly, firms must take reasonable care to make it clear who has what responsibility and to ensure that the affairs of the firm can be adequately monitored and controlled.
- proportionality: The restrictions the FSA imposes on the industry must be proportionate to the benefits that are expected to result from those restrictions. In making judgements in this area, the FSA takes into account the costs to firms and consumers. One of the main techniques they use is cost benefit analysis of proposed regulatory requirements. This approach is shown, in particular, in the different regulatory requirements applied to wholesale and retail markets.
- innovation: The desirability of facilitating innovation in connection with regulated activities. For example, allowing scope for different means of compliance so as not to unduly restict market participants from launching new financial products and services.
- international character: Including the desirability of maintaining the competitive position of the UK. The FSA takes into account the international aspects of much financial business and the competitive position of the UK. This involves co-operating with overseas regulators, both to agree international standards and to monitor global firms and markets effectively.
- competition: The need to minimise the adverse effects on competition that may arise from the FSA's activities and the desirability of facilitating competition between the firms it regulates. This covers avoiding unnecessary regulatory barriers to entry or business expansion. Competition and innovation considerations play a key role in the FSA's cost-benefit analysis work. Under the Financial Services and Markets Act, the Treasury, the Office of Fair Trading and the Competition Commission all have a role to play in reviewing the impact of the FSA's rules and practices on competition.

Accountability and management

The FSA is accountable to Treasury Ministers, and through them to Parliament. It is operationally independent of Government and is funded entirely by the firms it regulates. Its Board consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 11 non-executive directors (including a lead non-executive member, the Deputy Chairman) selected by HM Treasury. This Board decides on overall policy with day-to-day decisions and management of the staff being the responsibility of the Executive. This is divided into three sections each headed by a Managing director and having responsibility for one of the following sectors: retail markets, wholesale and institutional markets, and regulatory services. Its regulatory decisions can be appealed to the Financial Services and Markets Tribunal.

Criticism of the FSA

External links

- [http://www.fsa.gov.uk/ FSA website]
- [http://news.bbc.co.uk/1/hi/business/4613661.stm BBC News: FSA under fire after Blair speech 06/06/2005]
- [http://news.bbc.co.uk/1/hi/business/4696419.stm BBC News: City watchdog revises probe rules 19/07/2005] Category:Financial regulation Category:Corporate governance

Secondary market

The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.

Function

In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid and transparent. Before electronic means of communications, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly. This is how stock exchanges originated, see History of the Stock Exchange.

Financial markets

In finance, financial markets facilitate:
- The raising of capital (in the capital markets);
- The transfer of risk (in the derivatives markets); and
- International trade (in the currency markets). They are used to match those who want capital (borrowers) to those who have it (lenders). Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

Definition

The term Financial markets can be a cause of much confusion. Financial markets could mean: 1. organisations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants. 2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc. In academia, students of finance will use both meanings but students of economics will only use the second meaning. Financial markets can be domestic or they can be international.

Types of financial markets

The financial markets can be divided into different subtypes:
- Capital markets which consist of:
- Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
- Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.
- Commodity markets, which facilitate the trading of commodities.
- Money markets, which provide short term debt financing and investment.
- Derivatives markets, which provide instruments for the management of financial risk.
- Futures markets, which provide standardised forward contracts for trading products at some future date; see also forward market.
- Insurance markets, which facilitate the redistribution of various risks.
- Foreign exchange markets, which facilitate the trading of foreign exchange. The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

Raising capital

To understand financial markets, let us look at what they are used for, i.e. what is their purpose? Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Lenders

Individuals do not think of themselves as lenders but they lend to other parties in many ways. Lending activities may be:
- putting money in a savings account at a bank;
- contributing to a pension plan;
- paying premiums to an insurance company;
- investing in government bonds; or
- investing in company shares. Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they make seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Borrowers

Individuals borrow money via bank loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the public sector borrowing requirement (PSBR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.

Derivative products

During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk.

Currency markets

:see Foreign exchange market Seemingly, the most obvious buyers and sellers of foreign exchange are importers/exporters. This may be true in the distant past whereby importers/exporters created the initial demand for currency markets. Importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS. The picture of foreign currency transactions today shows:
- Banks and Institutions
- Speculators
- Government spending (for example, military bases abroad)
- Importers/Exporters
- Tourists

Financial markets in popular culture

:Gordon Gekko is a famous caricature of a rogue financial markets operator, famous for saying "greed ... is good". Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view. Stories that make the headlines involve the incompetent, the lucky and the downright skilful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example. Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.

Financial markets slang

- Big swinging dick, a highly successful financial markets trader. The term was made popular in the book Liar's Poker, by Michael Lewis
- Geek, a Quant
- Nerd, a Quant
- Quant, a quantitative analyst skilled in the black arts of Phd level (and above) mathematics and statistical methods
- Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of frightening complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living.

References

- An Introduction To Global Financial Markets, Steven Valdez, Macmillan Press Ltd. (ISBN 0333764471) Category:Finance

Derivatives market

The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Futures markets

:Main article: Futures exchange Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange, trade in standardized derivative contracts. These are options contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions in these contracts with the exchange, who acts as central counterparty. When one party goes long (buys) a futures contract, another goes short. When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another. The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. (source: Bank for International Settlements (BIS): [http://www.bis.org/publ/regpubl.htm])
Over-the-counter markets
Tailor made derivatives, that are not traded on a futures exchange, are traded on over-the-counter markets. These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, etc. The total notional amount of all the outstanding positions at the end of June 2004 stood at $220 trillion. (source: BIS: [http://www.bis.org/publ/regpubl.htm])
Netting
Figures below are from September, 2005 [http://www.occ.treas.gov/deriv/deriv.htm]
- Total derivatives (notational amount): $96.2 trillion (September, 2005)
- Interest rate contracts: $82.0 trillion
- Foreign exchange contracts: $8.6 trillion
- Total number of commercial banks holding derivatives: 769
See also

- Securitization
- Financial engineering category:Derivatives

Financial markets

Definition

Types of financial markets

Raising capital

Lenders

Borrowers

Derivative products

Currency markets

Financial markets in popular culture

Financial markets slang

References

- An Introduction To Global Financial Markets, Steven Valdez, Macmillan Press Ltd. (ISBN 0333764471) Category:Finance

Zatoka Ryska

Zatoka Ryska, łot Rīgas jūras līcis, est. Liivi Laht, zatoka Morza Bałtyckiego pomiędzy Łotwą a Estonią. Estonią Powierzchnia Zatoki Ryskiej wynosi około 18 tysięcy km². Maksymalna głębokość wynosi 54 m; zasolenie 3,5-6promili. Estońska wyspa Saaremaa (oraz znacznie od niej mniejsza - Muhu) odgradza zatokę od szerszych wód Morza Bałtyckiego. Oprócz wymienionych dwóch, w Zatoce Ryskiej znajduje się jeszcze kilka mniejszych wysepek (wszystkie należą do Estonii), a wśród nich najważniejsze: Kihnu, Ruhnu, Abruka i Manilaid Najważniejsze miasta nad Zatoką to Ryga (Łotwa) i Pärnu (pol. Parnawa, Estonia), a największe wpadające do niej rzeki to Dźwina, Lielupe (Lelupa) i Gauja (Gauwa). E 67, międzynarodowa droga "Via Baltica" (Helsinki- Tallin - Ryga - Kowno - Warszawa - Piotrków Trybunalski - Wrocław - Kłodzko - Hradec Králové - Praga) na swoim bałtyckim odcinku biegnie wzdłuż Zatoki, przy czym łotewsko-estońskie przejście graniczne znajduje się w pobliżu łotewskiej miejscowość Ainaži. kategoria:Morze Bałtyckie Ryska ja:リガ湾

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